CHICAGO — The timing, size, and bonding levels of a sweeping infrastructure-funding package in Illinois remain unclear and are the subject of much debate for stakeholders banking on Gov. J.B. Pritzker to make good on his promises.
“We must be prepared to make a big investment in our transportation and infrastructure with the passage of a capital bill that will be introduced in this legislative session,” Pritzker said when he unveiled his fiscal 2020 budget in February.
The package, as Pritzker envisions, would be supported by a variety of funding sources and there’s strong bipartisan support for the spending. A three-fifths majority is needed for new bonding and the Democratic governor enjoys majorities in the House and Senate. As in most cases for state and local governments, where to get the cash remains an open question.
The state is grappling with a more than $3 billion budget gap, an $8 billion bill backlog, and a pension contribution that consumed 19% of the general fund last year. The state's interest penalties remain high, with the spread on its 10 year bond around 175 basis points over the Municial Market Data's top-rated benchmark and nearly 100 basis points more than the BBB benchmark.
While the depth of Illinois’ capital needs are being scrutinized at legislative hearings, some experts consider the planning process to be flawed. Those flaws and the strengths and weaknesses of short- and long-term funding mechanisms were recently discussed at the Chicago Civic Federation and Federal Reserve Bank of Chicago’s “Unlocking the Box: Best Practices for Financing Illinois' Infrastructure" conference.
The state’s $31 billion 2009 Illinois Jobs Now capital program has mostly run its course. It relied on a series of transportation-related fees, fines, and taxes on candy, various beverages and liquor. It also legalized video gambling.
Those sources have fallen short, requiring the state to dip into the general fund to repay general obligation borrowing costs. A new capital package took a backseat to the budget disputes between the legislature’s Democratic majority and former Gov. Bruce Rauner, a Republican, so many believe the time is now ripe to end the drought.
On revenue, the state needs to tread cautiously to avoid straining its roughly $39 billion general fund, which could trigger a downgrade on its GO ratings which are just one to two notches above junk.
On new borrowing, S&P Global Ratings will look at “what extent the debt might actually affect the operating budget at this point” and Illinois is in weak position to absorb much more debt, said panelist member Carol Spain, S&P’s lead Illinois analyst. S&P rates Illinois’ general obligation bonds BBB-minus with a stable outlook.
“At the same time we recognize that if Illinois doesn’t spend money on infrastructure that could weaken its economic development prospects and that could also lower state tax collections,” Spain said. “Either way Illinois is in between a rock and hard place. Investing in infrastructure and finding a sustainable revenue source of it is really key to Illinois’ trajectory.”
A series of big-ticket items Pritzker proposed, led by passage of a measure to put a constitutional amendment to voters allowing for a shift to a graduated income tax from a flat one, have dominated the legislative agenda.
With GOP lawmakers opposed to the graduated tax and resistance among some Democrats, many believe the capital budget and pet projects for local districts will be used as an incentive to support the graduated tax and the capital and operating budgets and graduated tax votes will all come to fruition late in the spring session.
NEEDS
The clearest message that's emerged in recent months from the public and private sectors representing the education, transit, and road sectors is the acute need for an infusion of funding, and a big one.
The Chicago Metropolitan Agency for Planning — the regional planning agency charged by local and state officials with holding the purse strings on federal funding — in its 2050 plan says an additional $24 billion of funding is needed to maintain the current regional transportation network, with $32 billion needed to upgrade it.
“We are at a crisis point and the worst thing we could do now is settle for a short-term solution that will put us back in the same situation five or 10 years from now,” CMAP executive director Joseph Szabo said when the plan was unveiled.
The Regional Transportation Authority of Illinois launched this month "get on board," a month-long campaign to drum up public support for a capital bill. The RTA, which has little remaining state authorized bonding capacity, has warned of a $2 billion to $3 billion annual shortfall over the next decade for capital.
The state needs $13 billion to $15 billion for maintenance of state roads over the next decade, Illinois Department of Transportation officials told lawmakers earlier this year.
Representatives and local school districts warned of overcrowding and the need to update school buildings. The state has a 15-year waiting list for 285 school district projects seeking financial help under the state’s school construction program in which the state will cover from 35% to 75% of the cost of an approved project.
The Illinois Board of Higher Education gave lawmakers a list of projects public community colleges and universities are seeking that carries a $2.1 billion tab. That’s scaled down from $4 billion of projects the schools need to maintain facilities and build new ones.
The backlog of deferred maintenance has “ballooned from $2.7 billion to $6.7 billion,” Nyle Robinson, the board’s interim director, told lawmakers.
SAFETY
To underscore the state’s dire needs, advocates of an Illinois capital bill used the closure in February of the 33-year-old Lake Shore Drive bridge in downtown Chicago after cracked steel beams were discovered.
“Infrastructure is not optional. It's a public safety issue, stupid,” Bank of America Merrill Lynch’s analytical team says in the firm’s April 5 Municipals Weekly piece.
The report, authored by municipal research strategist, Ian Rogow highlighted the alarms being set off with increasing frequency over bridge collapses and other infrastructure failures. Most recently it was the collapse of a Chattanooga, Tenn., bridge which coincided with the release of the American Road & Transportation Builders Association annual deficient bridge study.
About 7.6% of the nation's 616,087 bridges are structurally deficient. Projected repair costs are $171 billion. Illinois ranked 6th in the size of the tab, about $5 billion, to fix its deficient bridges.
With pension funding demands eating up more resources, infrastructure is being crowded out. “So, what could it take to increase investment? Two things potentially: lower required pension contributions and, unfortunately, perhaps the surfacing of greater safety issues,” the report said.
REVENUE
Sen. Andy Manar, D-Bunker Hill, and Sen. Martin Sandoval, D-Chicago, are hosting hearings through April to build the case.
“This is not going to work unless we have the ability to pay for it and that’s going to take a broad and difficult conversation,” Manar said.
With a new federal infrastructure package making little headway, local tax hikes have the support of some key business organizations while public surveys show taxpayers don’t want to dig further into their own pockets.
Various groups and political leaders are pushing a motor fuel tax as an anchor for the capital bill even though experts say it’s a weak fix given the shift to more fuel efficient and electric vehicles and changing trends with car ownership.
Illinois has not raised its 19 cents per gallon motor fuel tax since 1990. Every five-cent-per-gallon increase in the motor fuel tax generates $20 million for Chicago and $250 million statewide.
Michigan, Wisconsin, and Minnesota governors have fresh proposals on the table, but with divided political leadership each faces a tough road. Ohio, which is led by the GOP, last week adopted an increase although it fell short of the governor’s original proposal.
Chicago’s outgoing Mayor Rahm Emanuel and his counterparts in the region recently called for a 20- to 30-cent-per-gallon increase in the motor fuel tax and to index future hikes to inflation. Other increases in traditional transportation funding sources, such as license fees, should be on the table, he said.
The Illinois Chamber of Commerce drafted what it calls a "modernization program" that would raise $2 billion annually for transportation. It includes a $4 billion bonding authorization to accelerate bridge improvements.
The proposal would phase in a hike that would bring the motor fuel tax to 44 cents from 19 cents, raise some registration fees while lowering others, and raise the registration fee for electric vehicles to bring it in line-with commercial vehicles.
Another proposal on the Senate side would raise the gas tax to 38 cents and raise driver licenses and vehicle registration fees to generate nearly $2 billion annually.
The 2016 constitutional amendment lock-boxing transportation-related public revenues would protect the allocation of new tax revenue and require multi-year spending plans.
“Doubling the state gas tax would bring Illinois to the second-highest overall gas tax burden in the nation, said Orphe Divounguy, chief economist for the conservative-leaning policy organization Illinois Policy Institute. “Frankly, Illinoisans can't afford it — especially low-income and downstate drivers who would be disproportionately burdened.”
BIGGER THINKING
With technology platforms advancing along with fuel efficiency “we are looking at an environment of diminishing returns” by relying on gas tax increases, said panelist Ted Hamer, a managing director at KPMG LLP. The gas tax debate is “compelling and needed” but it has a “short life.”
While congestion pricing advances in New York, Oregon and California are at the forefront of considering miles-per-traveled fees and “every state really ought to be considering this,” Hamer said. “There’s no one singular option” with tax-increment financing (TIFs), road user charges and public-private partnerships all playing a potential role.
Asset concessions fell out of favor locally due to the bitter taste left by Chicago’s flawed 2008 parking meter system lease, but a P3 for new assets has benefits if the public can be convinced.
“We need to look at all of our revenue streams and we also need to look at how we deliver projects more efficiently and how we … manage long-term risks and shift those risks to the private sector who can better manage them,” said panelist Mitchell Holzrichter, a partner at Mayer Brown LLP.
Some have suggested a lease of the Illinois toll road but it has complications as proceeds would be limited to transportation use under the lock-box amendment. A $20 billion to $30 billion valuation could be tough for the market to digest, the panelists said.
The state proposed its first P3 in a toll-supported managed lane project but it’s been slow going.
CMAP has proposed a series of revenue measures to leverage an additional $56 billion over its 32-year planning period. It relies on an initial gas tax hike with then a shift to a per-mile traveled charge to replace the state’s motor fuel tax along with other proposals including expanding the state’s sales tax to some services, and implementing a special regional revenue tax from a source like the gas tax or registration fees to leverage federal dollars.
The Chicago Transit Authority has turned to the federal TIFIA program, established a first-of-its-kind TIF corridor and borrowed to make do amid a lack of state capital and declining state operating subsidies, said conference panelist Dorval Carter, president of the Chicago Transit Authority.
The gas tax is a start, but he sees New York’s recent adoption of a congestion pricing model for Manhattan and the growing interest in ground transportation tax changes as potential sources. The sticking point is they “require a certain level political willingness,” he said.
REFORMS
Illinois sorely needs a capital planning process with a sustainable revenue plan to replace the current structure where projects are views as goodies to be doled out in exchange for other votes.
Leveraging federal dollars and incentivizing innovation should be core pieces of any capital plan, said panelist Tom Kotarac, vice president of Transportation and Infrastructure for the Civic Committee of the Commercial Club of Chicago.
A sea change is needed for Illinois and others where maintenance cost “for the life of the asset” — which can’t be built into bond proceeds — is factored into the financing equation, said conference panelist Michael Pagano, dean of the University of Illinois at Chicago’s College of Urban Planning and Public Affairs.
